Money Laundering in Supply Chain

With the globalization of trade and commerce, supply chains have become increasingly complex, creating vulnerabilities that can be exploited by criminals seeking to conceal the illicit origins of funds.

AML supply chain refers to the interconnected network of processes, stakeholders, and technologies involved in detecting, preventing, and mitigating money laundering risks within an organization or across multiple entities.  Supply chains can be complex and dynamic, involving multiple stakeholders and spanning across various geographic locations. Money laundering in Supply chain affects organizations of all sizes in all industries. It can also occur at any step in a supply chain.

How Money Laundering Occurs in Supply Chain?

The main participants or third parties involved in Supply Chain are, vendors, producers, manufacturers, transporters, distributors, wholesalers and supply chain managers etc., these third parties expose vulnerabilities to money laundering. Money launderers swiftly identify vulnerabilities and seek to exploit or influence these entities to launder their illicit funds. One common method is, Transaction Layering where funds are moved through multiple transactions within third-party payment systems to obscure their source. Another technique involves dividing large transactions into smaller, less suspicious amounts to avoid detection. Additionally, money launderers may establish Shell Companies or fictitious businesses to further obscure the true nature of the funds. These entities can be established with nominee directors or shareholders, making it difficult to identify the true beneficial owners.

Third Party Money Laundering and Its Methods

Third-party Money Laundering occurs when individuals or entities not directly involved in criminal activities, help criminals launder illicit funds on behalf of criminals. This poses challenges for businesses and Regulatory Authorities as criminals exploit vulnerabilities within third-party entities. Common methods are:

  • Trade-based Laundering – which involves, over- or under-invoicing of goods, fictitious trade documentation, or the use of shell companies to conceal the true nature of the transactions.
  • Professional Services – The professionals such as lawyers, accountants, or financial advisors may knowingly assist in the creation of complex financial structures or transactions that obscure the source of the funds.
  • Money Service Businesses – MSBs, including money transfer services, currency exchange bureaus, and check cashing businesses, are vulnerable to abuse by money launderers due to their role in facilitating cash transactions.
  • Real Estate Transactions – Real estate transactions offer opportunities for money laundering through the purchase and sale of properties using illicit funds.
Money Laundering Risk Factors in Supply Chain

Money laundering risks in the supply chain can be categorized in many factors, each presenting unique challenges and vulnerabilities:

  • Industrial Risk – Some industries are involved in high-value goods or services, complex supply chains, and global trade networks, such as Jewellery and Precious Metals, Luxury Goods, Real Estate and High-Value Commodities etc. These factors increase the chances for companies to be exposed to higher AML riskswith unparalleled consequences.
  • Geographical Risk – It pertains to the location-specific factors that increase the vulnerability of certain regions or jurisdictions to Money Laundering activities. Geographical Risk Factors are Proximity to High-Risk Countries, Presence of Informal Economies and Cross Boarder trading etc.
  • Sanction risk – It refers to the potential for supply chain transactions to involve entities or individuals subject to international sanctions. Some factors are Cross-Border Transactions, Lack of Due Diligence and Complexity of Supply Chains.
Supply Chain Due Diligence

Supply chain due diligence refers to the process of assessing and managing risks associated with the various partners, suppliers, and intermediaries involved in a company’s supply chain. It involves conducting thorough investigations, assessments, and audits to ensure compliance with regulatory standards.

  • Know Your Supplier (KYS) – It is very important to know who your suppliers, partners, and customers, where they are coming from, and who is standing behind those companies? KYS refers to the due diligence process undertaken by businesses to verify the identity, reliability, and integrity of their suppliers in the context of Anti-Money Laundering (AML). This process involves gathering and verifying information about suppliers’ backgrounds, ownership structures, financial stability, and compliance with regulatory requirements. This is a good technique for any business would be to execute an initial assessment of all new clients before signing a contract.
  • Enhanced Due Diligence (EDD) – If there are high-risk elements or red flags identified in the Supply Chain or unknown information, Regulated Entities should conduct EDD measures prior to engaging with such suppliers. EDD consists of site visits, desk based reviews, and reviewing of sample transactions of suppliers on an ongoing basis. EDD for high-risk relationships should be carried out during the establishment of relationship and on an ongoing. As per Ministry of Economy UAE (MOE UAE), Enhanced Due Diligence includes:
  • Identification and verification of each entity in the Supply Chain through operating licenses or similar document
  • Identification and verification of the ownership of each entity (direct or indirect ownership up to 25% and above) and connected parties (board of directors and senior management)
  • Identification of the related businesses (subsidiaries, parents, and affiliates)
  • Identification of any nexus with the government, political parties, military, criminal networks, or non-state armed groups through screening or publicly available data and research
  • screening the entity name, ownership including ultimate Beneficial Owners and connected parties through government watchlists for finding any sanction listings or adverse media (at a minimum United Nations sanction lists and the UAE local terrorist list should be utilized)
Regulatory Framework and Policies

Money Laundering Supply Chain Policies are established frameworks and guidelines implemented by companies to prevent, detect, and mitigate the risk of Money Laundering within their Supply Chains. These policies outline the procedures and controls that companies must adhere to in order to ensure compliance with Anti-Money Laundering (AML) regulations and mitigate the risk of inadvertently facilitating illicit activities.

As per Ministry of Economy (MOE) UAE the Regulated Entities must follow:

  • Regulated Entities in the UAE must establish internal governance system to effectively implement and maintain a Supply Chain Due Diligence program.
  • Regulated Entities must appoint a compliance officer, who must be a senior person in the organization, reporting directly to the Chief Executive Officer (CEO) (or equivalent) and has access to the board of directors, or equivalent.
  • The compliance officer should be responsible for the overall management of the Supply Chain Due Diligence process.
  • All records, documents, data and information collected as part of Supply Chain Due Diligence of an actual and potential relationships should be kept, preferably, on a computerized database for not less than five years from completion of a transaction or termination of the business relationship with the supplier.
  • Regulated Entities must develop and implement a training program for all persons involved in the responsible Supply Chain Due Diligence process.
  • All records, documents, data and information should be immediately available to regulators and law enforcement agencies upon request.
Supply chain Audit

In the UAE, Anti-Money Laundering (AML) Supply Chain audits play a crucial role in ensuring regulatory compliance and mitigating financial crime risks. Regulated entities must conduct audits in accordance with regulations, covering all aspects of the Supply Chain Due Diligence framework. This includes policies, procedures, risk assessment, supplier engagement, chain of custody, and traceability. Audits should assess compliance with regulatory standards and independence of auditors. Reviewers should be competent and adhere to accepted auditing standards. They should also possess specialist knowledge in supply chain due diligence principles and internationally accepted guidelines.

Key aspects covered in Supply Chain audits include evaluating the effectiveness of AML policies and procedures, conducting risk assessments across the supply chain, verifying supplier engagement details, assessing the chain of custody and traceability of funds, and reviewing communication practices with participants throughout the supply chain. Audits involve clear communication of objectives, onsite investigations, document reviews, and generating audit findings with recommendations for improvement. By conducting regular AML Supply Chain audits, companies in the UAE can enhance their due diligence practices, strengthen compliance efforts, and safeguard against illicit financial activities.